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Closure of the Renewables Obligation: thoughts on legal remedies

The government announced on 18 June 2015 that it intends to close the Renewables Obligation (“RO”) for onshore wind across Great Britain on 31 March 2016, one year earlier than originally planned. In an earlier Law Now, we commented upon the possible impact that the government proposals may have on wind farm developments which are the subject of ongoing litigation, particularly those with planning consents already in place. In this article, we consider the potential for judicial review in relation to the early closure of the RO and what recourse to legal remedies may be available to foreign investors seeking to challenge the decision.

Judicial Review

Those seeking to challenge the legislation ending the RO may look to the courts to provide a remedy. It has already been hinted in the press that the decision is “irrational” and could therefore be subject to judicial review. As the decision to discontinue the RO one year early forms part of the Energy Bill (which is primary legislation), this leaves a narrow margin to challenge. Primary legislation may only be challenged on grounds of a breach of the Human Rights Act 1998 (“HRA”) or on grounds that it is incompatible with EU law.

Article 1 of the first Protocol (“A1P1”) to the European Convention on Human Rights (incorporated into the HRA) which provides that every natural or legal person is entitled to the peaceful enjoyment of their possessions may be a starting point. Developers that have concluded contracts with the expectation that they will receive a subsidy may feel that the early closure of the RO contravenes A1P1. The courts have previously held that concluded contracts can be possessions capable of protection by A1P1 but unsigned contracts cannot. In this regard, we query the extent to which developers will have signed contracts at this stage, although they may well have committed to orders in relation to new turbines and/or contracted to sell output. Further, A1P1 is qualified in that interference with this right can be justified if (a) it pursues a legitimate aim that is in the public interest; (b) is proportionate; and (c) is subject to any conditions provided for by law.

In the meantime, a grace period has been proposed by the government. Not only may this be used to demonstrate that a fair balance has been struck and that a reasonable and proportionate approach has been taken by the government, it may also narrow the pool of those with cause to bring an A1P1 claim. Under the current proposals, developers will still be eligible for a subsidy under the RO up to the original closure date if they are able to demonstrate they had (1) relevant planning consents; (2) a grid connection offer and acceptance; and (3) confirmation of ownership of, or option to purchase, the relevant land, all by 18 June 2015. We query how many developers will be in a position to satisfy these requirements.

In any event, a successful claim under A1P1 against the primary legislation may not generate the desired result. A court can only make a ‘declaration of incompatibility’; the Act will remain valid as a court is not able to strike down an Act of Parliament for a human rights breach. It would then be up to Parliament to change the law.

Challenges by Foreign Investors

Meantime, international agreements may offer foreign investors an alternative forum for challenge. Bilateral investment treaties concluded between the UK and other countries, and the European Energy Charter Treaty (“ECT”) (to which the UK is a signatory) create frameworks for international investment. They place obligations on states as regards foreign investors. One such obligation potentially relevant to a challenge to the early removal of the RO, is that states must meet standards of ‘fair and equitable treatment’ (“FET”) for investors. The ECT requires parties to the treaty to “create stable, equitable, favourable and transparent conditions for Investors” and “accord at all times […] fair and equitable treatment”.

An investor is able to enforce the FET standard under the ECT’s dispute resolution provisions. If amicable settlement cannot be reached after three months, an investor can bring a claim either in the domestic courts, or resort to international arbitration.

Judges and arbitrators will look to principles of consistency, transparency, stability and predictability in a state’s actions. In particular, if an investor has a ‘legitimate expectation’ that a state would retain a particular regime or practice, a change of policy absent sufficient justification may be a breach of FET.

Looking briefly at the notion of ‘legitimate expectation’ in a similar type of challenge to the end to subsidies (this time in the context of solar power), the courts have considered (i) whether it could be said there was a ‘legitimate expectation’ that a RO would not be closed early; and (ii) if such an expectation did exist, whether the government had a sufficient policy justification for defeating that expectation. In the solar judicial review (Solar Century Holdings Ltd & Ors v Secretary of State for Energy & Climate Change[2014] EWHC 3677 (Admin) (07 November 2014) the court, in finding that there was no such expectation, linked its decision to the broader financial implications for government spending. It stated: “the reason why […] there could never be an expectation in this case is that the [HM Treasury document “Control framework for DECC levy-funded spending”] represented a systemic risk that all operators must be taken to have accepted when they sought support under the RO scheme. The risk was that if uptake for support led to increases in expenditure beyond the agreed HM Treasury limits then the scheme might (or even would) be curtailed in order to bring expenditure back under control. As such no operator could expect that the system would inevitably or necessarily last until 2017.”

Whilst an arbitral tribunal under the ECT might have different reasoning to our domestic courts and the solar challenge was fact specific, in any challenge to the RO for onshore wind, it will be open to the government to argue that the same economic caveats are present. Additionally, the previous early closure of another form of renewable energy may point towards a known, and accepted, risk for other potential recipients of the RO.

Next Steps

The government has announced that it will host a half day workshop on 23 July in London to enable onshore wind developers and other stakeholders to share their views on the proposals to end the subsidies. The proposed grace period will also be discussed. Given the difficulties (and cost) of judicial review and challenges under the ECT, it may be that this, along with other lobbying efforts by the industry, will be the most effective route for those seeking to challenge the early end to onshore wind subsidies.